Giles Coghlan LLB, Lth, MA
HYCM
With all the talks and drama surrounding the US debt ceiling, it is easy to lose sight of what’s going on in terms of US rates. The latest STIR market pricing has a 66% chance that the Fed will be on hold in June. Powell has recently hinted at the possibility of a June hold, so what is the latest we can discern from Wednesday’s FOMC minutes?
Uncertainty reigns
The minutes show that there is uncertainty regarding whether or not more rate hikes are needed. The problem the Fed has is that if it hikes interest rates too high then that will restrict the US economy. It might make it easier to deal with inflation, but the risk is that the economy will cool too quickly. This is why some members were uncertain. Some members thought that the return to 2% inflation could be unacceptably slow and more hikes are needed. Other members said that further policy tightening might not be necessary if the economy developed broadly in line with their outlook. Still, others saw that rate cuts did not need to be signaled this year. So, the minutes were quite a mixed bag.
Banking sector fears
These were acknowledged but downplayed. The bank sector was recognized as being well-capitalized overall and seen as sound and resilient. However, FOMC participants assessed that the bank sector stress would weigh on overall sentiment, but to an uncertain extent.
Labor market
FOMC participants noted some signs that the imbalance in the supply and demand in the labor market was easing, with prime-age labor force participation returning to its pre-pandemic level. There were further reductions in the rates of job openings and quits noted.
Overall
There was little reaction to the FOMC minutes, which makes sense with US debt ceiling talks eclipsing them. However, the recent Fed communication and the need for the Fed to stress optionality after the May meeting would lean more towards a coming rate pause for June. That would give participants some time to assess the impact of the interest rate hikes that have already taken place. Fed’s Waller also pointed out this week that April’s PCE inflation print and May’s CPI will be critical for the Fed. So, a high print in either of these will increase the chances of a rate hike from the Fed in June again. The DXY remains very strong on all the risks circulating at the moment, with two key weekly levels marked below.
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